HECS-HELP Changes: The Government’s Best Policy in Years

When was the last time you looked at a government policy and thought to yourself, ‘That’s a bloody great idea’?

We admit to readily being disappointed by what passes for policymaking in Canberra. But we’re always ready to give credit where it’s due.

This week’s federal budget gave us plenty to sink our teeth into.

Don’t worry; we won’t waste your time talking about the income tax hike. Or the levy on banks. Or the change to working visas. Or the penalty applied to welfare recipients that don’t vaccinate their children. You’ll find plenty of digital ink spilt on those issues elsewhere.

Instead, this weekend’s Markets & Money indulges in a personal bugbear. One that’s bothered us for years.

The ABC reports:

‘University fees are on the rise. Students will have to pay an extra $2,000 to $3,600 for a four-year course. That’s a fee increase of 1.8 per cent next year, and 7.5 per cent by 2022.

‘The income level at which you will have to start repaying your HECS [Higher Education Contribution Scheme] debt will also be reduced. Currently you only have to repay your debt when you earn over $55,000. From July next year, you’ll have to repay it once you hit $42,000.

‘Universities are also facing a 2.5 per cent efficiency dividend.

‘The only win for university students is the introduction of Commonwealth Supported Places in sub-bachelor programs like diplomas.’

We’re relieved to see the government finally doing something about the HECS.

The system allows students to enrol at university without paying anything upfront. In return, graduates must start repaying their debt once they find work. But they only begin paying down their debt once their salary exceeds the threshold.

In theory, HECS makes it easy for students to repay their loans. In practice, things aren’t quite as clear cut.

The government expects that 23% of existing loans will go unpaid. With the HECS loan book at $50 billion, these ‘bad loans’ amount to $11.5 billion. That’s $11.5 billion in taxpayer money being flushed down the toilet. A figure that’s only expected to grow if the government sits on its hands.

Don’t get us wrong, we’re not oblivious to the benefits of HECS. It opens up higher education to a much broader spectrum of society. That benefits both the students and the economy. After all, an educated workforce is critical to employment prospects and economic prosperity.

The more workers there are, the more money they make, and the more they pay in taxes too. Seen from this perspective, the taxpayer investment in HECS pays off in the long run.

But it’s an awfully long long-run, if you get our drift.

The average loan is repaid within nine years. If nothing changes, that will rise to 11 years over the next decade. These timeframes may not seem unreasonable. But just keep in mind it doesn’t take into account the one in four loans that go unpaid.

In our view, the scheme shouldn’t reward students as much as it does. Not when there’s $50 billion in taxpayer money on the line.

Of course, we’re not calling for the abolition of HECS. Far from it.

Given a choice between the Australian and US higher-ed system, our loyalty is with the home team. US courses are more expensive on average than their Aussie counterparts. And the US loan book makes Australia’s $50 billion look paltry by comparison. It currently stands at a staggering US$1.4 trillion.

Not only is higher education big business in America, it’s a big problem for students footing the bill. The difference in the US is that higher education loans are no different to any other debt. Which explains why there is a much bigger onus on students paying fees upfront. And why the average American student uses savings to pay for one-third of their tuition.

HECS is different. The system makes it easy for students to defer payments. So it’s shouldn’t surprise anyone that we’re seeing costs to taxpayers ballooning.

By 2026, the government expects the HECS loan portfolio to blow out to $185.2 billion. Worse still, the annual cost of the program will go from $1.7 billion today to $11.1 billion. For a government expecting to reach surplus at some point next decade, that’s not a good sign. And it’s why we applaud the government’s proposal to increase costs and lower the threshold.

Rising course costs should raise the premium students place on their education. Yet this will only work if the threshold falls too, as it would under this proposal.

We only question whether a $42,000 threshold is low enough. Granted, it would affect all graduates earning below a typical entry-level salary. That would ensure most new full-time jobs trigger HECS repayments within the first year. By government estimates, some 183,000 extra people would start making payments.

That’s exactly how it should be.

Loans are issued to be repaid. Usually at a long-term loss to the borrower. If banks make terms difficult on borrowers, why should we as taxpayers be any different?

Investment in human capital, like any investment, should seek returns. Preferably in the quickest time possible too. But if one in four never repays their loan, it tells us there’s something wrong with the system.

Raising fees should help lower the number of bad loans in the long term. And lowering the threshold should ensure the average repayment time shortens. That means less waste, and more efficient use of taxpayer money. What’s not to like?

***

This week in Markets & Money

In Monday’s Markets & Money, Vern responded to readers who felt he had been too harsh with his ‘central bankers are clueless’ remarks last week. But he wasn’t about to cut central bankers any slack. And for good reason.

Home foreclosures have crept above 10 million worldwide. Since 2008, US$60 trillion of new debt has flooded global markets. All because the Fed kept rates too low for too long.

It’s the same story repeating over and over again. We witnessed the same thing in the early 2000s before the tech crash. And in 2007 before the subprime collapse. Only now, the debt is much larger. And the potential collapse much greater.

On Tuesday, Jason suggested that Emmanuel Macron’s win in the French presidential election was anything but good news for France. Rather, it marks the beginning of the end for la République.

The establishment got the candidate they wanted in power. And it suggests very little will change in France in the future. In fact, Jason expects already-high taxes to rise further. And he expects Macron to make even more outrageous unfunded promises.

Contrary to popular opinion, Jason doesn’t believe China is manipulating its currency lower. The yuan has been pegged higher to protect the economy from blowing up. With the corporate sector finding it hard to repay cheaply-borrowed loans, China needs a strong currency. That way, it can ensure the inflow of cheap imported goods. This arrangement allows Chinese industries the opportunity to produce cheap goods to sell at home and abroad.

But the yuan peg is unsustainable, according to Jason. And when it breaks, it could trigger a financial meltdown, especially in commodities. Does that mean you should stay away from resource stocks?

On Thursday, Bernd reflected on the effect Macron’s victory had on the Volatility Index. The VIX was trading at a 24-year low in the aftermath of the French election. The markets seemingly got the candidate they wanted. In the words of one analyst, with global market threats subsiding, things were starting to feel like 2005–06 again.

While those were heady days indeed, we don’t need to remind you of what came next.

Meanwhile, it was lost on the markets that the two biggest economies in the world are tightening their purse strings. Both the US and China are reining in spending on poor growth prospects.

The Beatles famously asked where all the lonely people belong. Having distanced himself from those around him who only recite what they hear in the mainstream, Vern was asking himself the same question.

Markets and Money

Markets and Money offers an independent and critical perspective on the Australian and global investment markets.

Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

May I suggest a more equitable policy, with a number of benefits: Eliminate all up-front fees (including union fees) to allow better access for qualified students from low-income backgrounds. Introduce a graduate tax for life on all income over the average wage and pay it to the university from which the student graduated. (The level of the tax should be sufficient on average to cover the cost of the universities’ teaching). I see this as having additional benefits, in addition to equity: – Both universities and students would have it in their self-interest to set high standards, as better graduates… Read more »

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